1. Franchisor Liability for the Acts of a Franchisee Under US Law November 1, 2014 Leslie K. L. Thiele Partner International Practice Group One Commerce Plaza Albany, New York 12260 P 518.487.7600 F 518.487.7777 www.woh.com

2.  If a franchisee – intentionally or unintentionally – injures another party by its actions or its negligence, is the franchisor responsible?  Example: the McDonald’s “hot coffee” case: Is McDonald’s HQ responsible for the patron’s severe injuries?  An injured plaintiff looking for “deep pockets” will sue anyone in the corporate chain of command (and some not!). - The impact (until 2014) of the lack of health insurance - Products: the plaintiff can sue anyone in the chain of sale  Why – and how - is an “innocent” franchisor on the hook? The Issues 1

3.  A tort claim requires a.Duty: the party causing the injury owes a duty to the person injured (often; a duty of care) b.Breach; The party causing the injury breached that duty. c.Causation: the breach is the actual and proximate cause of the injury d.Damages: the plaintiff must prove the extent of its damages  No duty, no recovery Standards for Liability 2

4.  A franchise involves a certain level of control over the operations of the franchisee A common business purpose / Prescribed operating model  Franchisor’s control over a franchisee could lead to DIRECT liability a. Duty: Franchisor’s control over franchisee’s day-to-day operation  inference of a “duty” to a plaintiff (cleaning, maintenance, etc.). b.Breach: Franchisor did not notice franchisee’s failure to clean c.Causation: Patron slid on slippery floor d.Damages: Broken leg  hospital bills, etc.  Franchisor can be sued directly by the injured party because its control created a DUTY to the injured party  Many states: no duty absent proof of control Direct Liability of the Franchisor 3

5.  A person is held strictly liable (liable without fault) for tortious conduct of another. a.Imposed though person did not commit any tortious act. b.Responsible because of the close relationship between that person and the person committing the tortious act. c.Common law concept  Agency relationships: a.Actual Agency: Franchisee is acting under direction of the franchisor ; franchisor controls the actions of the franchisee A principal is vicariously liable for the actions of its agent. b.Apparent Agency: franchisor leads/allows third party to reasonably believe that the franchisee is the franchisor’s agent or that the third party is dealing with the franchisor…and the third party relies on this misrepresentation or belief to its detriment.” Vicarious Liability of a Franchisor 4

6.  Agency law doesn’t fit franchise relationship well: control essential.  “Control test”: Did franchisor exercise sufficient general control over franchisee to be considered a “principal” and responsible? a.Sufficient control  franchisor responsible regardless of actual involvement or ability to prevent disaster b.Leading test until the last 10 years  “Instrumentalities test”: Did franchisor exercise control over the instrumentality which caused the harm? a.No control over the instrumentality = no liability b.Current trend in vicarious liability analysis: recognizes that strict agency analysis does not fit well More Roads to Vicarious Liability 5

7.  Avoid franchisees in states which have not yet clearly adopted the “instrumentalities” test  Carefully analyze the level of control exercised by the franchisor over day-to-day operations to avoid “actual” agency -Case law: how much control is “too much” -Periodic inspections rather than daily control -McDonald’s: Extreme high coffee temperature REQUIRED by HQ with knowledge that it would scald  Avoid “apparent agency” through publicity of independent ownership & operating relationship, signage of ownership  Indemnification and/or contribution clauses in a franchise agreement in case of third-party suit Avoiding Vicarious Liability 6

8. Contact Information Whiteman Osterman & Hanna LLP Leslie K. L. Thiele One Commerce PlazaDirect: (518) 487-7636 Albany, New York 12260lthiele@woh.comlthiele@woh.com USA Tel: (518) 487-7600 Fax: (518) 487-7777 www.woh.com The information in this presentation is intended as general background information on certain franchise issues. It is not to be considered as legal advice with regard to any particular case or situation.. Please consult your legal and tax advisors before taking action. © 2014 Whiteman Osterman & Hanna LLP All rights reserved.